Know the Other Side’s Next Best Option

ith its big university, natural-foods stores, and a #11 ranking on estately.com’s list of best hippie towns, Missoula has a laid-back, environmentally friendly vibe. And this may explain how we ended up speaking with the ultimate in recycling-based businesses: Eko Compost.
Pulling into a dirt parking lot, we stepped out to bright early-morning sunshine. A fifty-something man, sporting an unbuttoned Hawaiian shirt, a scruffy gray beard, and long hair covered by a bandana, soon wandered over and asked about Scott’s car (and, of course, the bike on top). Paul, a Deadhead since his college days in Vermont, was tempted to compare notes, but then noticed the man’s T-shirt, which honoured a Jimmy Buffet tribute band. The powerful aroma in the area certainly meant this was not a paradise in which to eat a cheeseburger.

We bantered with the friendly stranger for a few minutes, and then began looking over his shoulder to spot the plant manager. Just then he said “I’m Phil Oakenshield, the plant manager. You must be the guys writing the book.” Phil, a Vietnam veteran, has been working at the compost plant for twenty years and, when we visited, had been running the place for about a year.

The business, Phil explained as we began a tour of the facility, is composting. Now you can dress up the terminology all you like. You can say that the primary input into compost is “biosolids,” and maybe that makes it sound ecological or scientific. But the fact of the matter is that we were standing in a field of crap (human crap, in fact), and this was a multiple-sense experience. It looked like crap, it felt like crap under our feet, and it really smelled like crap.

The biosolids, which were obtained from the municipal water treatment plant next door, were spread on an open field for acres, with several large Caterpillar earthmovers combining them with wood and other recycled organic material. Eko Compost creates piles of the mixed material and monitors temperature and moisture carefully. As a pile “cooks,” bacteria break the biosolids down into carbon dioxide, water, and humus, which is a stable organic matter that makes a delightful planting soil.

The end user is a gardener planting a tree, shrub, or perennial, and this means Eko Compost’s target customer is a garden centre. Phil described his recent sales and marketing efforts. “Lowe’s doesn’t have straight compost right now,” he said. “We’re trying to start small with them. Unlike Home Depot, the Lowe’s districts have a little bit of latitude to try to get local products. We’re working on getting distribution through their Montana district, which would be their five stores in Montana and maybe five in Idaho.”

As the tour ended, we also noticed a very large conveyor belt— two or three stories high and a couple hundred feet long— positioned to dump material from the treatment plant next door onto EKO Compost’s property. The City of Missoula, Phil told us when we reached his cluttered office, built the wastewater treatment facility in 1962. In 1977, EKO Compost opened up next door after negotiating an agreement to take waste from the treatment plant. The plant/ compost facility combination has subsequently been copied many other places, allowing EKO Compost to be the self-proclaimed “company that started it all.”

“You have to buy the biosolids?” said Scott, shocked, perhaps, that anyone would pay for such a thing. Phil clarified: “No, no. They pay us to take it.” Eko Compost is in the unusual position of earning revenue from both downstream— customers paying for their compost— and upstream, in this case the treatment plant paying them to take the bio solid input.

“What determines the price they pay?” Mike asked.

Phil proceeded to point out the advantageous position EKO Compost is in when it comes time to negotiate with the plant. “We kind of have them over a hard spot because I could say to them, ‘Well, you can take it up to the BFI landfill and pay twice the amount. Or you can pay us.’”

Paul, catching on more quickly than usual, added, “I think that, once you’ve got the conveyor belt in, you’ve got them where you want them.” Phil agreed, “Yeah, because we can turn their conveyor belt off and start doing biodiesel.”

This discussion points out two crucial factors that shape every negotiation: the next-best options of the parties. Negotiation is deal making, and any deal has to make the parties to that deal better off than they would be elsewhere. In this case, the next -best option for the city is to truck their biosolids to a BFI landfill. The next-best option for Eko Compost is to use their employees and facility to produce biodiesel. Any deal struck between the two has to leave both parties at least as well off as if they had chosen these alternatives instead.

Importantly, the next-best options determine what you’re negotiating over— the difference between the lowest price Eko Compost would be willing to accept (enough to make composting more attractive than biodiesel) and the highest price the city would be willing to pay (if the price were above that, they’d truck the biosolids to BFI instead of using the conveyor belt). Any price within this range makes both sides happy to work together rather than pursuing their next-best option. The parties can split the difference and both be made better off.

Understanding the other side’s next-best option is essential to negotiating well because changes in the other side’s next-best option create a new range of acceptable agreements. To see why, suppose BFI raises their prices, making the city’s next-best option more expensive than it was previously. The range has increased because there’s more at stake for the city in the negotiation —they would be willing to pay Eko Compost more to avoid the BFI option. Eko Compost can use this change in the value of the city’s next-best option to push for a higher price. The time to push for a better deal is precisely when the other side’s next-best option has gotten worse or when yours has gotten better.

Phil described how this plays out with Eko Compost. “They need us more than we need them, and they keep telling us that. They keep asking us, ‘You guys aren’t thinking of selling or moving out?’ Every time they say that, it’s click, click the price up.

“Meanwhile,” he continued, “we’re telling them things like, ‘We really don’t need your biosolids. We don’t really need to stay in composting here because we are into biodiesel.’”

To get the most out of the negotiation, Phil wants to make sure the city remembers that its next-best option is very expensive while also conveying that EKO Compost can do well elsewhere. Paul lamely suggested that if the negotiations went badly, Phil should simply yell, “I’m not going to take your crap anymore!” Phil chuckled politely, but we got the sense he might have heard that one before. Know more about how to get the most out of negotiation only at the University Canada West, one of the best universities in Canada, offering various business and management related programs.

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